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Phillip C. Querin, Partner
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
Sellers' and Buyers' Remedies Under the Real Estate
Sales Agreement
[June 2003]
In most consumer transactions, residential real estate
included, sellers and buyers frequently do not pay much attention
to the remedy provisions of their transactional documents. This
can be for a variety of reasons: (1) They feel they already know
what their remedies are; (b) They really aren’t concerned
with the issue, since they do not anticipate any enforcement problems;
(3) They simply aren’t interested. Regardless of the reasons
– and there may be others – the responsibility for explaining
the remedies, as well as other significant portions of the Sale
Agreement, falls on each party’s Realtor®.
Before considering the actual legal remedies, Realtors® should
remember that the mediation of most disputes under the Sale Agreement
is a necessary first step in any dispute resolution process. (See,
Section 38.)1
If mediation is skipped and the matter goes to arbitration, there
is a risk that the prevailing party would be denied the recovery
of attorney fees. Accordingly, at the outset of any dispute exceeding
the $5,000 Small Claims Court jurisdictional limit, the party seeking
the relief (“the complainant”) should first make an
offer to mediate. Only if the other side (“the respondent”)
ignores or refuses to do so, should the complainant take the matter
directly to arbitration.
Sellers’ Remedies
The seller remedies portion of the Sale Agreement is found at Section
29. This is an important section, especially the last line, which
summaries the seller’s remedies as follows:
It is the intention of the parties that under no circumstances
shall buyer be liable to seller under this Agreement beyond the
amount of earnest money provided for herein.2
In the event that the buyer breaches the agreement, e.g. by refusing
to perform, this clause will have the effect of limiting the seller’s
remedy to retention of buyer’s earnest money deposit. It makes
no difference whether the buyer’s failure to perform occurs
at the start of the transaction or on the day before closing.
Although this clause is not, in itself, harsh, its effect can be
devastating to the seller who has taken only a small earnest money
deposit, then, upon the belief that a closing will occur soon, proceeds
to make other plans, such as purchasing another home, and incurs
substantial expenses along the way. Since retention of the buyer’s
earnest money deposit is the seller’s sole remedy, determining
the amount of the deposit to take is an important consideration.
Here are some factors to consider when determining the amount of
earnest money to demand: (a) Is the buyer well-qualified, or are
there risk factors that might make default a distinct possibility?
(b) What are the sellers’ plans – i.e. will they be
acquiring another home shortly, or will they be making other arrangements,
such as moving out of state – that will make the buyer’s
default costly? (c) What is the sale price of the home?3
(d) Is it a buyer’s or seller’s market?4
Since the seller’s remedy is limited to retention of the
earnest money deposit, it is important that the Realtor® discuss
with the seller whether the property should be removed from the
market after the Sale Agreement is signed. If the home is attractive
and well-presented, it may generate back-up offers, which can be
useful in protecting the seller from the adverse consequences of
a first buyer’s default.5
Lastly, sellers should not be shy about asking for additional earnest
money deposits either when the Sale Agreement is first being negotiated,
or later when the buyer seeks a concession, such as an extension
of time, which could adversely impact the seller if a default occurred
then. The bottom line is that the more money the buyer has in the
transaction that is subject to forfeiture in the event of breach,
the greater likelihood that the buyer will be incented to close
the transaction.6
Buyer’s Remedies
The remedies available to the buyer are broader than those available
to the seller. First, in the event of a seller default, the buyer
has the right to a full refund of the earnest money deposit. In
addition, the Sale Agreement provides:
However, acceptance by Buyer of the refund shall not constitute
a waiver of other legal remedies available to Buyer.7
The practical and legal effect of this clause is that if the seller
defaults – usually by refusing to close the transaction –
the buyer has the right to demand his/her earnest money deposit
back and pursue any other claims that would flow from the seller’s
breach. For example, if the seller failed or refused to close, and
the buyer incurred $15,000 in moving expenses from out of state,
the buyer could seek recovery of those damages, in addition to recovery
of the earnest money deposit.
However, in many cases, buyers are not interested in recovering
money damages, since it is the home they want. In such cases, the
buyer should not demand the return of the earnest money agreement,
but rather insist upon the seller’s full performance in accordance
with the terms of the Sale Agreement. This remedy is called “specific
performance.” While most cases of seller non-performance are
the result of a change of mind, occasionally there are cases in
which the seller agrees to sell, but later learns that he/she cannot
convey marketable title (e.g. the liens on the property exceed the
purchase price, or the title contains a defect that the seller cannot
remove). In these cases, the buyer’s primary remedy would
not be specific performance, but damages8
in addition to a refund of the earnest money deposit.
In specific performance cases, the buyer should attempt to do all
things required of him or her under the terms of the agreement.
This means applying for financing, having the home inspected (if
access is available) and even appearing at closing to sign documents.
This helps establish that they are “ready, willing and able”
to perform. However, since the law does not impose upon buyers the
obligation to perform “useless acts” if the seller has
denied access, refused to perform, and told escrow he/she will not
sign, some steps may be unavailable to the buyer simply because
of the seller’s non-cooperation.
Generally, however, it is wise for sellers who wish to pursue a
specific performance claim, to act promptly, and make sure that
the seller could never argue that they buyer failed to perform.
This is especially true with financing. The buyer should do everything
possible to obtain a loan commitment.
One of the dangers of seeking specific performance is that the
seller could do something precipitous, such as transferring title
to the property to a third party, or encumbering the property with
a loan, easement or deed restriction. It is for this reason that
the filing of a lis pendens is appropriate and necessary.
A lis pendens is simply a recorded notice, filed in the
county where the property is located, telling the world that the
property is currently in litigation (or if filed under the provisions
of the Sale Agreement, in arbitration.) This gives priority to the
buyer over other claims against the title that are later recorded.
Since the need to file the lis pendens is usually immediate,
and since it cannot be filed without there first being an underlying
claim filed, the buyer must decide quickly about his/her course
of action, upon learning that the seller will not close the transaction.
This means that a claim usually must be filed with the appropriate
arbitration service – even before the mediation has occurred.9
Conclusion
As can be seen from the above discussion, the sellers’ and
buyers’ remedies are substantially different. In the event
the buyer fails to perform, the seller is limited to retention of
the earnest money deposit. For this reason, listing agents should
be careful to make sure their sellers are fully apprised of the
risks of proceeding with an inadequate deposit. If the seller refuses
to perform, the buyer’s remedies are wide open, ranging from
damages to specific performance.10
In such cases, Realtors® need to act promptly, encouraging their
clients to seek legal counsel, since time is of the essence.
FOOTNOTES
1
However, if the matter is within the jurisdiction of the Small Claims
Court, i.e. $5,000 or less, mediation through the Sale Agreement
protocol does not apply, since it is already a part of the Small
Claims Court process. Remember, however, Small Claims Court only
involves money claims. Any other non-monetary remedy sought
by a buyer or seller would not be available in Small Claims Court.
2 This clause appears
in bold at lines 200-201 of the current Sale Agreement form,
which was last revised in July 2002.
3 The price of the
home should not be used for application of a “rule-of-thumb”
approach, e.g. 10% of the sale price, or other such formulas. The
amount of earnest money is supposed to reflect a genuine pre-estimate
of the seller’s damages – not just a simple percentage
of the sale price. The use of “rules-of-thumb” that
do not bear any reasonable resemblance to the seller’s actual
damages could be struck down by the arbitrator as a penalty, and
not a valid liquidated damage provision. If this occurred, the seller
would be left to “prove” the amount of his/her actual
damages resulting from the buyer’s breach, and this is oftentimes
very difficult to do, since it is hard to quantify a seller’s
lost opportunities from other buyers who did not make an offer.
4 If it is a seller’s
market, i.e. there are fewer sellers than buyers – i.e. inventory
is low – the seller is in a stronger position to demand a
larger deposit than if it is a buyer’s market, where there
is a glut of available homes for buyers to chose from. Buyer’s
and seller’s markets can occur geographically, e.g. desired
locations in a broader community, or financially, e.g. in certain
price ranges throughout the community.
5 Oregon law does
not require that real estate licensees continue to market
the seller’s home after an offer has been accepted.
6 I have intentionally
omitted a discussion of “non-refundable” earnest money
deposits. While there may be certain circumstances under which it
is appropriate, doing so requires some skill in drafting, since
there are printed portions of the Sale Agreement which provide that
the deposit will be refunded under certain circumstances. Accordingly,
extreme care should be used before attempting to draft a provision
making the buyer’s deposit “non-refundable.”
7 This clause appears
at lines 196-197 of the current Sale Agreement form, which was last
revised in July 2002.
8 Such damages would
normally be measured by the difference between the purchase price
and the market value of the home, i.e. giving the buyer “the
benefit of the bargain.” Unfortunately, if the sales price
and market value are the same, this measure of damages would not
be available to the buyer.
9The filing of arbitration
before mediation is permissible under the OREF Sale Agreement.
See, lines 259-260. In such cases, it is prudent to file the Statement
of Claim in arbitration and expressly state, Buyer hereby offers
to mediate this claim.”
10 Generally, the
buyer cannot get both specific performance and damages, except
in those cases where the specific performance itself is inadequate
to make the buyer whole – e.g. the Sale Agreement provided
that the seller would pay for certain repairs, which were never
done.
© Copyright 2003. Phillip C. Querin,
Davis Wright Tremaine. No part may be reproduced without the author’s
express written consent.
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